In support of President Obama's continued effort to combat pay discrimination, the OFCCP announced on August 6, 2014 a Notice of Proposed Rulemaking (NPRM) that will amend the regulations to require federal contractors and subcontractors to submit an annual Equal Pay Report (EPR) on employee compensation.

Although the details of the EPR are not yet finalized, the NPRM provides a generous preview of what lays ahead for federal contractors and subcontractors. Here are some important things to know and consider as we wait for the final details on the EPR:

Who is affected by the NPRM?

What is the new EPR?

What does the OFCCP hope to accomplish with the new EPR?

How will the NPRM affect federal contractors and subcontractors?

We will answer each point in the following discussion:

Point 1: Who is affected by the NPRM?The proposed regulations will only apply to federal contractors and first tier-subcontractors with 100 employees or more and hold federal contracts or subcontracts worth $50,000 or more for at least 30 days, hence, providing a reprieve to smaller contractors/sub-contractors.

Point 2: What is the new Equal Pay Report (EPR)?The new EPR is essentially the Employer Information Report (EEO-1 Report) augmented with compensation information. Here are some details:

The proposed reporting period for the EPR is January 1 thru March 31 each year using the previous year’s earnings.

Employers would be required to submit two (2) additional pieces of employee information:

A summary of W-2 wages for all workers in each EEO job category broken down by race, ethnicity, and sex.

The number of hours worked by all employees in each EEO job category, broken down by race, ethnicity, and sex.

Encourage greater voluntary compliance with the law by providing federal contractors the opportunity to analyze their compensation policies and practices, and the opportunity to make the necessary compensation adjustments outside a compliance evaluation; and

Minimize the burden placed on small and non-profit federal contractors by focusing only on contractors with 100 employees or more.

In practice, it is clear that the OFCCP hopes to have greater success in identifying and obtaining successful enforcement actions on compensation related audits. The OFCCP hopes to achieve this by making total compensation (W-2 wage) comparisons at the EEO-1 job category level, which will add two additional methods in their enforcement arsenal:

Cast a wider net in their initial compensation investigations and therefore, also have a higher probability of “catching” errant contractors. It is the OFCCP’s hope that pay differences by EEO-1 categories are more diagnostic of potential pay disparity than Job Groups, Pay Bands, etc.

Make compensation comparisons between contractors across similar industry NAICS codes1 and identify and analyze industry trends. The OFCCP proposed that pay differences within an EEO-1 category between companies in the same industry (NAICS code) may be an indication of pay discrimination.

Ultimately, the new EPR will have little effect in enforcement success if the OFCCP does not increase the technical expertise in their staff. Why? Results from an EPR-based investigation are insufficient to carry the burden in establishing a case of pay discrimination. Instead, the EPR is wasting resources and diverting OFCCP’s attention away from important, enforceable, and actionable methods of compensation investigation. See “The Bottom-Line” below.

Point 4: How will the NPRM affect federal contractors and subcontractors?

Contractors may experience an increase in audit and legal exposure. It is a known fact that one of the bases for an OFCCP compliance review is the EEO-1 reports. The EPR, in conjunction with the EEO-1 reports could increase audit and legal exposure for contractors. Specifically, if the proposed reporting period for the EPR (January-March) and the current reporting period for the EEO-1 Reports (July-September) will remain the same, contactors could possibly be audited based on EITHER the composition of their workforce (EEO-1 Report) and/or the compensation data (EPR).

Due to differing reporting periods for the EEO-1 reports (July to September) and the EPR (January to March), contractors would now be required to pull data, for reporting purposes, more than once a year.

It becomes more necessary than ever for federal contractors to ensure that the assigned EEO job categories are appropriate for their jobs.

In practice, to prepare an EPR, contractors will need to add W-2 wage information onto EEO-1 reports. The ease and accessibility of summary W-2 wage information will be a major determinant of this burden.

CONCLUSIONS: THE BOTTOM-LINE

Details aside, what is the bottom-line? How is this going to change the federal contracting experience? For contractors, there are two major concerns:

1-Complying with the NPRM in creating the new EPRIf a contractor can easily obtain W-2 wage information and is comfortable working with spreadsheet applications (e.g., Excel), then generating an EPR will be a small burden.

The EPR is an extension of the current EEO-1 report by two additional fields: 1) W-2 wage information and 2) hours worked.

Since federal contractors already generate EEO-1 reports as part of their affirmative action plan reporting efforts, appending two additional fields should be fairly simple if the new information is available.

2-Audit and Legal RiskThere will be a lot of opinions and discussions on this, but it is important to cut through the chatter and focus on the facts:

The OFCCP may apply the EPR to introduce new lines of investigation (e.g., by EEO-1 categories and industry NAICS code) and in that sense, yes, there is added audit and legal risks.

For enforceable findings of pay discrimination, the OFCCP must successfully establish charges within a Title VII of the Civil Rights Act of 1964 (CRA 1964) and/or Equal Pay Act (EPA) framework.

The OFCCP has largely failed to find substantive pay discrimination in a Title VII and EPA framework. Given that Title VII and EPA remain unaltered by the NPRM, it is safe to conclude that OFCCP will continue to struggle in their efforts to find substantive pay discrimination.

The theater of compensation-equity warfare is on a statistically technical battlefield. The OFCCP needs to increase the technical expertise of their staff should they hope to make gains in this combat.

Concluding Note: To be 100% protected against any/all OFCCP compensation audit investigations, contractors simply need to ensure that their pay practice is compliant with Title VII and EPA requirements. This is achieved through proactive compensation audits and reviews. Rather than worrying about this or any future compensation-related NPRM, it is imminently easier and more painless for contractors to get ahead of the OFCCP and simply ensure that their compensation practice is Title VII and EPA compliant. Contractors are always pleasantly surprised at how easy and painless a proactive compensation analysis is.

Side Note: Please note that the proposed rule was published in the Federal Register on August 8th, 2014, and the OFCCP must receive all comments by November 6th, 2014. It’s important to voice your opinion! This NPRM may unsettle most of the federal contracting and subcontracting community as they may now be forced to submit more sensitive information to the government. Recalling the outburst of Vietnam Era Veterans' Readjustment Assistance Act (VEVRAA) and Section 503 of the Rehabilitation Act of 1973, as amended, the DOL/OFCCP subsequently removed several proposed items because of the comments they received by federal contractors and subcontractors.